Let’s focus on Guru John Hussman
GuruFocus.com is having its annual event of letting subscribers vote and elect this year’s “Guru of the Year”. The leading candidates include Bill Ackman,, Bruce Berkowitz, John Hussman, Seth Klarman, Robert Rodridguez, , and Prem Watsa. These individuals each had an outstanding career in investing to earn a place in www.gurufocus.com, and especially, they have done exceptional job compared to their peers in this terrible year for stock investing. I want to take the opportunity to review some of them to help our viewers casting a more informed vote.
Today, I will focus on John Hussman, manager of Hussman Strategic Growth Fund (HSGFX).
A hedge fund for the mass
Among thousands mutual funds, the one Hussman manages is in a tiny small category call “long/short” funds. Its investment strategy involves buying and short-selling, using stocks or options and is usually reserved for hedge funds. A search in mutual fund database reveals that only 54 such long/short mutual funds have more than five years of history, and the performance of John Hussman is among the top 10% of them.
Unlike typical hedge funds, which are marketed to only qualified clients through so called “private placement”, Hussman’s fund is a no-load mutual fund available to the mass. The minimum investment is only $1,000, and the annual expenses is at a low 1.15%.
Fund Performance
During the past eight years, Hussman has rewarded his investors handsomely. From the fund inception on July 14, 2000 to November 30, 2008, in a general down market, his fund averaged 8.48% a year, outperforming S&P 500 by about 11% per year. $10,000 invested in the fund since the inception would become $19,744 through the end of October, 2008, whereas the same amount invested in S&P 500 index would become $7,091.
YTD through December 11, 2008, the fund returned -9.1%, as compared to the 40% drop of S&P 500. The annual returns of the fund are listed in the following table:
What strikes me the most is that Hussman not only achieved better return than the market index, he also accomplished a smaller standard deviation (or risk) than the market index. So much for the Market Efficient Theory, which states that you can’t achieve better rate of return and lower risk simultaneously.
So what is his ace up in his sleeve?
Well, he actually has several.
But before I get to them, I have this comment: unlike many other fund managers, who keep their cards close to their chest, John Hussman writes extensively, explaining what he is doing with the money and why and how he does it. His fund prospectus also clearly spells out his portfolio management process. His “Weekly Market Comment” is free for the public and is a must-read for many value investors.
1. “Market Climate”
"Market Climate" is the first ace and the central concept to understand Hussman. Hussman assesses Market Climate based on two dimensions: The first is valuation, which basically measures whether stocks are cheap in terms of fundamental merits. The second is the quality of market action, which considers the technical behavior of a wide range of securities and industry groups, essentially it measures whether people like to invest in stocks. Combinations of favorable and unfavorable valuation and market action make four basic "Market Climates", as shown in the following Chart.
Being a former professor in University of Michigan, Hussman has much more supplicated definitions and descriptions for these terms; however, as transparent as Hussman, he falls short of giving away exactly how he calculating the valuation level of a stock, nor will he disclose what exactly constitute different market actions. His reason? in order not to benefit the competitors. Fair enough.
But it doesn’t really matter! For in his weekly comment, he discloses exactly what he thinks about the on-going valuation level and market action at the time. We just have to be content with the yummy taste of the egg without insisting on seeing the process of egg making.
2. Market Valuation
On total market valuation level, however, Hussman gave a very detailed description how he reaches conclusion in the February 22, 2005 comment. His whole thesis is established on the fact that in long run, S&P 500 peak-to-peak earning grows at a rate of about 6% (see picture below).
Hussman introduced a term called “price/peak earning” in order to smooth out the conventional P/E ratio that is sensitive to the business cycle. Historical data shows for the newly defined PE (price/peak earning) tends to peak at 20, and bottom at 7; it has a historical median of 11 and historical average of 14.
Using price/peak earnings multiples and assuming peak-to-peak earnings growth of 6% annually, the projected annual total-return on the S&P over T years is:
Long term total return = (1+6%)(future PE / current PE)^(1/T) - 1
+ dividend yield(current PE / future PE + 1) / 2
The first term is just the annualized capital gain, while the second term reasonably approximates the average dividend yield over the holding period. Now if the projected long term total return is not more than the risk-free Treasury rate and then some, we have a market valuation unfavorable situation.
From John Hussman’s point of view, market has been unfavorably valuated for the most part of the past eight years until recently.
3. Leveraging and Hedging
Hussman positions his investment according to the prevailing climate. In the most favorable Climates, when stocks are cheap and people have a good appetite for them, Hussman will hold an aggressive position, leveraging, conceptually through purchasing of call optionsof stock index (Russell 2000 or S&P 500), up to 150% of his equity. In the least favorable climate, when the stocks are expensive and people are not keen to the idea of holding stocks, he will typically attempt to remove the impact of market fluctuations from the portfolio through hedging, typically through purchasing put options of market index. The most defensive position is a fully hedged position in which the entire value of long positions is hedged.
In practice, since fund inception in 2000, up till now, Hussman has been in fully or partially hedged position. The following table lists the market climates and changes in strategies since inception:
In the fund’s June 30, 2006 and also in June 30, 2008 Annual reports, Hussman explained why he is more defensive in this cycle than during a “typical market cycle”, in which his model would suggest expose to mark risk for 70% of the time, however,
“Since 2000, the same measures have suggested an average of market risk of less than 20%, with a defensive stance --- fully or partially hedged --- established fully 100% of the time. The fact that the S&P 500 Index has underperformed risk-free Treasury bills over the past decade provides some validation for that defensive stance, but it is important to recognize that our reluctance to accept substantial market risk over the recent cycle has been unusual”. (June 30, 2008 Annual report.)
While it is yet to be seen that Hussman will identify the “Market Climate” soon enough to capture the next “favorable valuation and favorable market action”, his past performance proved that at least his hedging practices were successful in achieving higher returns and lower risks.
One thing Hussman emphasizes over and over is that his fund is not a bear fund, a fund betting the market will go down. He claims he makes no short term predictions of the market. His econometric measures only address the market condition as is without inference of the future movement of the general market; and he never hold a net short position in any given market.
4. Stock Sector Allocation
Stock sector allocation played a very important role in Hussman’s performance.
Typically, Hussman invests over 90% of its net assets in between 100-200 stocks. Although because of the large number involved, there is typically no particular stock making or breaking his portfolio. But collectively, the performance of his selected stocks is rather impressive: looking at Table 1 above, if taken away the effect of the hedges that he placed on the portfolio, the “naked” portfolio still averaged 6.37% between July 24, 2000 to September 30, 2008, beating the S&P 500 Index handsomely by annualized rate of 7.4%; and again he achieved a smaller standard deviation (i.e., lower risk) than the Index. Again, he defies the Market Efficient Theory.
Hussman rarely discussed specific stock positions he takes or is going to take beyond what is legally required. But we do know the kind of stocks he tends to take: Just as the market as a whole can be measured along the valuation and market action dimensions, individual stocks and sectors can also so evaluated.
Such a disciplined approach enabled Hussman get in and out the sectors at the perfect timing:
As he stated in his December 2000 Semiannual report:
“Compared to the major market indices, the Fund has a smaller weight in technology stocks, due to extremely high valuations (e.g. high P/E and price/revenue multiples) as well as unfavorable market action in this group. In contrast, the Fund has above-market weightings in health care, utilities, energy, defense and apparel. These higher weightings reflect a combination of favorable valuation and market action in these groups.”
And in June 30, 2003 Annual Report, after the market reaches the bottom, he disclosed:
“Beginning in the third quarter of 2002, the Fund increased its holdings in technology stocks, as well as medical and pharmaceutical stocks that appeared to be trading at depressed values.”
Then in June 30, 2008 Annual Report, he disclosed:
“The largest sector holdings as a percent of net assets were in information
technology (32.5%), consumer discretionary (21.0%), health care (23.8%),
6 and consumer staples (12.5%). The smallest industry weights relative to the
S&P 500 Index were in energy (0.4%), financials (0.0%) and utilities (0.0%).”
So at the beginning of the century, he steered way from and stepped in technology sector almost at the perfect timing; and just before the collapse of the financials earlier this year, he stayed away from the sector entirely.
5. Put everything together
In the June 30, 2003 annual report, Hussman discussed that the performance drivers of any particular stock:
“The return of any stock can be broken into three parts: (1) the portion of return driven by qualities specific to that stock (valuation, management, products, financial strength, trading activity, and so on); (2)the portion of return driven by general market fluctuations; and (3)random fluctuation.”
In the same annual report, he carried on discussing how he treats each kind of risks. On the market risk, in the same annual report, he said:
“Based on our assessment of market conditions, we can decide whether to accept the impact of market fluctuations on these stocks, or whether to hedge the portfolio in an attempt to remove the impact. “
So this explains that even during the past eight years when the market remains at a historical high valuation level, Hussman still invested nearly 90% of his fund in stocks and use the remaining 10% or less to hedge his position. He has been counting on portion of the return of stocks that exceeded the market return to deliver his portfolio performance.
In the 2003 annual report, he continued to discuss how he deals with the random risk:
“Finally, we can manage the risk of random fluctuations in our individual holdings through broad diversification, we can also use those fluctuations as opportunities, by purchasing candidates we view as attractive on short-term weakness, and selling holdings we view less favorably on short-term strength.”
I agree with the diversification part, but I am not sure anyone can do it right on taking short-term weakness part.
And that is the only part I am not sure of John Hussman. For everything else, I think he has a solid formula for success.
So What is the Guru thinking now?
In the June 30, 2008 Annual Report, Hussman noted,
“From the standpoint of discounted long-term cash flows, I currently believe that the S&P 500 Index remains priced to achieve relatively unsatisfactory returns over the coming 5-7 year period. However, substantial market weakness over a shorter period could reduce valuations to the level where expected long-term market returns would appear satisfactory or even compelling. At that point, the Fund is likely to accept a substantially greater level of market risk than it has in recent years. Thus, the defensiveness of the Fund's investment position in recent years should not be viewed as typical. Our exposure to market risk is generally proportional to the return that we can expect from such risk. So a more aggressive exposure to risk would, of course, be motivated by expectations of higher total returns over the complete market cycle.”
Of course, Hussman claims no credit for prophesying the “substantial market weakness” that happened just a couple of months later, in September to November of 2008. As a matter of fact, he never claims his model can predict short term movements of the market.
It is interesting to summarize how he changed his opinion towards the market valuation level during the past three months
1. Valuation Assessment
It appears as long as the S&P 500 is under 1000 points, John Hussman considers the market favorably valuated. Hussman provided the following analysis in his Nov.10, 2008 Weekly Market Comment
“Our 10-year total return projections for the S&P 500 Index are presented below. The heavy line tracks actual 10-year total returns since 1950 (that line ends a decade ago for obvious reasons). The green, orange, yellow, and red lines represent the projected total returns for the S&P 500 assuming terminal valuation multiples of 20, 14 (average), 11 (median) and 7 times normalized earnings. “
According to this picture from him, for the next ten year, S&P 500 Index will return 4% a year even it is traded at 7 times the normalized earnings, and as much as 13% if it reach the 20 times normalized earnings, hence justifying his favorable market valuation assessment.
2. Market Action Assessment
Market action is changing faster, and according to John Hussman, it is tentative at best. For this reasons, Hussman is still very cautious, in the December 15, 2008 Weekly comment, he stated:
“As of last week, the Market Climate in stocks was characterized by favorable valuations and generally unfavorable market action. We do have some tenuous signs of early improvement, but trading volume has been sluggish and follow-through has been more tepid than we would prefer. Moreover, the market is no longer oversold, and prices are no longer deeply compressed, which opens up some risk of a fresh decline. Accordingly, we tightened our hedges some last week, largely by raising the strike prices on our index hedges”.
Despite of the near 40% fall of S&P 500 Index this year, the market action is still unfavorable and he is still hedge.
3. Sector Allocation and Top holdings
As for September 30, 2008, Hussman has the following sector allocation. The top three sectors are technology (25.7%), consumer services(22.9%), and health care (20.4%). The bottom? Telecommunication (0.9%), utility (0.6%), and financials(1.3%).
Also as of September 30, 2008, these stocks weighted more than 2% of his fund:
Data source: Hussman Strategic Growth Fund annual reports cited in this article can be found in www.hussmanfunds.com. The pcitures of Market Climate,
S&P 500 6% Annual Peak-to-Peak Earning Growth, and the Project 10-year Rate of Return are can also be found from www.hussmanfunds.com
GuruFocus.com is having its annual event of letting subscribers vote and elect this year’s “Guru of the Year”. The leading candidates include Bill Ackman,, Bruce Berkowitz, John Hussman, Seth Klarman, Robert Rodridguez, , and Prem Watsa. These individuals each had an outstanding career in investing to earn a place in www.gurufocus.com, and especially, they have done exceptional job compared to their peers in this terrible year for stock investing. I want to take the opportunity to review some of them to help our viewers casting a more informed vote.
Today, I will focus on John Hussman, manager of Hussman Strategic Growth Fund (HSGFX).
A hedge fund for the mass
Among thousands mutual funds, the one Hussman manages is in a tiny small category call “long/short” funds. Its investment strategy involves buying and short-selling, using stocks or options and is usually reserved for hedge funds. A search in mutual fund database reveals that only 54 such long/short mutual funds have more than five years of history, and the performance of John Hussman is among the top 10% of them.
Unlike typical hedge funds, which are marketed to only qualified clients through so called “private placement”, Hussman’s fund is a no-load mutual fund available to the mass. The minimum investment is only $1,000, and the annual expenses is at a low 1.15%.
Fund Performance
During the past eight years, Hussman has rewarded his investors handsomely. From the fund inception on July 14, 2000 to November 30, 2008, in a general down market, his fund averaged 8.48% a year, outperforming S&P 500 by about 11% per year. $10,000 invested in the fund since the inception would become $19,744 through the end of October, 2008, whereas the same amount invested in S&P 500 index would become $7,091.
YTD through December 11, 2008, the fund returned -9.1%, as compared to the 40% drop of S&P 500. The annual returns of the fund are listed in the following table:
| Table 1. Performance of Hussman Strategic Growth Fund | |||
| Year Ended | HSGFX | HSGFX Unhedged | S&P 500 Index |
| 12/31/00 | 16.40% | 4.86% | -9.37% |
| 12/31/2001 | 14.67% | 9.13% | -11.89% |
| 12/31/2002 | 14.02% | -10.03% | -22.10% |
| 12/31/2003 | 21.08% | 37.68% | 28.68% |
| 12/31/2004 | 5.16% | 12.81% | 10.88% |
| 12/31/2005 | 5.71% | 8.43% | 4.91% |
| 12/31/2006 | 3.51% | 13.88% | 15.79% |
| 12/31/2007 | 4.16% | 0.89% | 5.49% |
| YTD(9/30/2008) | 4.50% | -16.76% | -19.29% |
| Inception to 9/30/08 | 10.76% | 6.37% | -1.04% |
| Standard Deviation | 6.73% | 13.64% | 16.47% |
What strikes me the most is that Hussman not only achieved better return than the market index, he also accomplished a smaller standard deviation (or risk) than the market index. So much for the Market Efficient Theory, which states that you can’t achieve better rate of return and lower risk simultaneously.
So what is his ace up in his sleeve?
Well, he actually has several.
But before I get to them, I have this comment: unlike many other fund managers, who keep their cards close to their chest, John Hussman writes extensively, explaining what he is doing with the money and why and how he does it. His fund prospectus also clearly spells out his portfolio management process. His “Weekly Market Comment” is free for the public and is a must-read for many value investors.
1. “Market Climate”
"Market Climate" is the first ace and the central concept to understand Hussman. Hussman assesses Market Climate based on two dimensions: The first is valuation, which basically measures whether stocks are cheap in terms of fundamental merits. The second is the quality of market action, which considers the technical behavior of a wide range of securities and industry groups, essentially it measures whether people like to invest in stocks. Combinations of favorable and unfavorable valuation and market action make four basic "Market Climates", as shown in the following Chart.
Being a former professor in University of Michigan, Hussman has much more supplicated definitions and descriptions for these terms; however, as transparent as Hussman, he falls short of giving away exactly how he calculating the valuation level of a stock, nor will he disclose what exactly constitute different market actions. His reason? in order not to benefit the competitors. Fair enough.
But it doesn’t really matter! For in his weekly comment, he discloses exactly what he thinks about the on-going valuation level and market action at the time. We just have to be content with the yummy taste of the egg without insisting on seeing the process of egg making.
2. Market Valuation
On total market valuation level, however, Hussman gave a very detailed description how he reaches conclusion in the February 22, 2005 comment. His whole thesis is established on the fact that in long run, S&P 500 peak-to-peak earning grows at a rate of about 6% (see picture below).
Hussman introduced a term called “price/peak earning” in order to smooth out the conventional P/E ratio that is sensitive to the business cycle. Historical data shows for the newly defined PE (price/peak earning) tends to peak at 20, and bottom at 7; it has a historical median of 11 and historical average of 14.
Using price/peak earnings multiples and assuming peak-to-peak earnings growth of 6% annually, the projected annual total-return on the S&P over T years is:
Long term total return = (1+6%)(future PE / current PE)^(1/T) - 1
+ dividend yield(current PE / future PE + 1) / 2
The first term is just the annualized capital gain, while the second term reasonably approximates the average dividend yield over the holding period. Now if the projected long term total return is not more than the risk-free Treasury rate and then some, we have a market valuation unfavorable situation.
From John Hussman’s point of view, market has been unfavorably valuated for the most part of the past eight years until recently.
3. Leveraging and Hedging
Hussman positions his investment according to the prevailing climate. In the most favorable Climates, when stocks are cheap and people have a good appetite for them, Hussman will hold an aggressive position, leveraging, conceptually through purchasing of call optionsof stock index (Russell 2000 or S&P 500), up to 150% of his equity. In the least favorable climate, when the stocks are expensive and people are not keen to the idea of holding stocks, he will typically attempt to remove the impact of market fluctuations from the portfolio through hedging, typically through purchasing put options of market index. The most defensive position is a fully hedged position in which the entire value of long positions is hedged.
In practice, since fund inception in 2000, up till now, Hussman has been in fully or partially hedged position. The following table lists the market climates and changes in strategies since inception:
| Table 2. Market Climate and Investment Position | |||
| Time Frame | Market Climate | Investment Position | |
| Valuation | Market Action | ||
| July,2000-June.2001 | Extremely Unfavorable | Unfavorable | Fully Hedged |
| Jul.2001-Mar.2003 | Unfavorable | Unfavorable | Fully hedged |
| Mar. 2003- Jun. 2004 | Unfavorable | Improving | Partially hedged |
| Jul. 2004-Jun.2005 | Unfavorable | Broadly hedged | |
| Jul. 2005-Jun.2008 | Unfavorable | Various | Hedged |
| Source of data: Hussman Strategic Growth Fund Annual Reports, 2000-2008. | |||
In the fund’s June 30, 2006 and also in June 30, 2008 Annual reports, Hussman explained why he is more defensive in this cycle than during a “typical market cycle”, in which his model would suggest expose to mark risk for 70% of the time, however,
“Since 2000, the same measures have suggested an average of market risk of less than 20%, with a defensive stance --- fully or partially hedged --- established fully 100% of the time. The fact that the S&P 500 Index has underperformed risk-free Treasury bills over the past decade provides some validation for that defensive stance, but it is important to recognize that our reluctance to accept substantial market risk over the recent cycle has been unusual”. (June 30, 2008 Annual report.)
While it is yet to be seen that Hussman will identify the “Market Climate” soon enough to capture the next “favorable valuation and favorable market action”, his past performance proved that at least his hedging practices were successful in achieving higher returns and lower risks.
One thing Hussman emphasizes over and over is that his fund is not a bear fund, a fund betting the market will go down. He claims he makes no short term predictions of the market. His econometric measures only address the market condition as is without inference of the future movement of the general market; and he never hold a net short position in any given market.
4. Stock Sector Allocation
Stock sector allocation played a very important role in Hussman’s performance.
Typically, Hussman invests over 90% of its net assets in between 100-200 stocks. Although because of the large number involved, there is typically no particular stock making or breaking his portfolio. But collectively, the performance of his selected stocks is rather impressive: looking at Table 1 above, if taken away the effect of the hedges that he placed on the portfolio, the “naked” portfolio still averaged 6.37% between July 24, 2000 to September 30, 2008, beating the S&P 500 Index handsomely by annualized rate of 7.4%; and again he achieved a smaller standard deviation (i.e., lower risk) than the Index. Again, he defies the Market Efficient Theory.
Hussman rarely discussed specific stock positions he takes or is going to take beyond what is legally required. But we do know the kind of stocks he tends to take: Just as the market as a whole can be measured along the valuation and market action dimensions, individual stocks and sectors can also so evaluated.
Such a disciplined approach enabled Hussman get in and out the sectors at the perfect timing:
As he stated in his December 2000 Semiannual report:
“Compared to the major market indices, the Fund has a smaller weight in technology stocks, due to extremely high valuations (e.g. high P/E and price/revenue multiples) as well as unfavorable market action in this group. In contrast, the Fund has above-market weightings in health care, utilities, energy, defense and apparel. These higher weightings reflect a combination of favorable valuation and market action in these groups.”
And in June 30, 2003 Annual Report, after the market reaches the bottom, he disclosed:
“Beginning in the third quarter of 2002, the Fund increased its holdings in technology stocks, as well as medical and pharmaceutical stocks that appeared to be trading at depressed values.”
Then in June 30, 2008 Annual Report, he disclosed:
“The largest sector holdings as a percent of net assets were in information
technology (32.5%), consumer discretionary (21.0%), health care (23.8%),
6 and consumer staples (12.5%). The smallest industry weights relative to the
S&P 500 Index were in energy (0.4%), financials (0.0%) and utilities (0.0%).”
So at the beginning of the century, he steered way from and stepped in technology sector almost at the perfect timing; and just before the collapse of the financials earlier this year, he stayed away from the sector entirely.
5. Put everything together
In the June 30, 2003 annual report, Hussman discussed that the performance drivers of any particular stock:
“The return of any stock can be broken into three parts: (1) the portion of return driven by qualities specific to that stock (valuation, management, products, financial strength, trading activity, and so on); (2)the portion of return driven by general market fluctuations; and (3)random fluctuation.”
In the same annual report, he carried on discussing how he treats each kind of risks. On the market risk, in the same annual report, he said:
“Based on our assessment of market conditions, we can decide whether to accept the impact of market fluctuations on these stocks, or whether to hedge the portfolio in an attempt to remove the impact. “
So this explains that even during the past eight years when the market remains at a historical high valuation level, Hussman still invested nearly 90% of his fund in stocks and use the remaining 10% or less to hedge his position. He has been counting on portion of the return of stocks that exceeded the market return to deliver his portfolio performance.
In the 2003 annual report, he continued to discuss how he deals with the random risk:
“Finally, we can manage the risk of random fluctuations in our individual holdings through broad diversification, we can also use those fluctuations as opportunities, by purchasing candidates we view as attractive on short-term weakness, and selling holdings we view less favorably on short-term strength.”
I agree with the diversification part, but I am not sure anyone can do it right on taking short-term weakness part.
And that is the only part I am not sure of John Hussman. For everything else, I think he has a solid formula for success.
So What is the Guru thinking now?
In the June 30, 2008 Annual Report, Hussman noted,
“From the standpoint of discounted long-term cash flows, I currently believe that the S&P 500 Index remains priced to achieve relatively unsatisfactory returns over the coming 5-7 year period. However, substantial market weakness over a shorter period could reduce valuations to the level where expected long-term market returns would appear satisfactory or even compelling. At that point, the Fund is likely to accept a substantially greater level of market risk than it has in recent years. Thus, the defensiveness of the Fund's investment position in recent years should not be viewed as typical. Our exposure to market risk is generally proportional to the return that we can expect from such risk. So a more aggressive exposure to risk would, of course, be motivated by expectations of higher total returns over the complete market cycle.”
Of course, Hussman claims no credit for prophesying the “substantial market weakness” that happened just a couple of months later, in September to November of 2008. As a matter of fact, he never claims his model can predict short term movements of the market.
It is interesting to summarize how he changed his opinion towards the market valuation level during the past three months
| Table 3. Market Climate Change in the past three months | |||
| Time Frame (2008) | Market Climate | S&P 500 Index Closed at | |
| Valuation | Market Action | ||
| Sept.29 | Unfavorable | Unfavorable | 1106 |
| Oct.6 | Slightly elevated | Unfavorable | 1056 |
| Oct.13 | Favorable | Unfavorable | 1003 |
| Oct.20 | Favorable | Early evidence of favorable market action | 985 |
| Oct.27 | Favorable | Tentative | 849 |
| Nov.3 | Favorable | Tentative | 966 |
| Nov.10 | Favorable | Tentative | 919 |
| Nov.17 | Slightly Favorable | Extremely unfavorable | 851 |
| Nov.24 | Favorable | Unfavorable | 852 |
| Dec.1 | Favorable | Unfavorable | 816 |
| Dec. 8 | Favorable | Early evidence of improvement | 910 |
| Dec.15 | Favorable | Unfavorable | 869 |
| Source of data: Hussman Strategic Growth Fund weekly market comment | |||
1. Valuation Assessment
It appears as long as the S&P 500 is under 1000 points, John Hussman considers the market favorably valuated. Hussman provided the following analysis in his Nov.10, 2008 Weekly Market Comment
“Our 10-year total return projections for the S&P 500 Index are presented below. The heavy line tracks actual 10-year total returns since 1950 (that line ends a decade ago for obvious reasons). The green, orange, yellow, and red lines represent the projected total returns for the S&P 500 assuming terminal valuation multiples of 20, 14 (average), 11 (median) and 7 times normalized earnings. “
According to this picture from him, for the next ten year, S&P 500 Index will return 4% a year even it is traded at 7 times the normalized earnings, and as much as 13% if it reach the 20 times normalized earnings, hence justifying his favorable market valuation assessment.
2. Market Action Assessment
Market action is changing faster, and according to John Hussman, it is tentative at best. For this reasons, Hussman is still very cautious, in the December 15, 2008 Weekly comment, he stated:
“As of last week, the Market Climate in stocks was characterized by favorable valuations and generally unfavorable market action. We do have some tenuous signs of early improvement, but trading volume has been sluggish and follow-through has been more tepid than we would prefer. Moreover, the market is no longer oversold, and prices are no longer deeply compressed, which opens up some risk of a fresh decline. Accordingly, we tightened our hedges some last week, largely by raising the strike prices on our index hedges”.
Despite of the near 40% fall of S&P 500 Index this year, the market action is still unfavorable and he is still hedge.
3. Sector Allocation and Top holdings
As for September 30, 2008, Hussman has the following sector allocation. The top three sectors are technology (25.7%), consumer services(22.9%), and health care (20.4%). The bottom? Telecommunication (0.9%), utility (0.6%), and financials(1.3%).
Also as of September 30, 2008, these stocks weighted more than 2% of his fund:
| Table 4. Hussman Top Holdings | ||
| Symbol | Company | Percentage (%) |
| JNJ | Johnson & Johnson | 3.47 |
| NKE | NIKE Inc. | 3.35 |
| AMZN | Amazon.com Inc. | 3.13 |
| KO | The CocaCola Company | 3.03 |
| BBY | Best Buy Co. Inc. | 2.95 |
| AZN | AstraZeneca PLC | 2.95 |
| RIMM | Research in Motion Ltd. | 2.93 |
| CL | ColgatePalmolive Company | 2.91 |
| ARO | Aeropostale Inc. | 2.76 |
| AMGN | Amgen Inc. | 2.72 |
| MSFT | Microsoft Corp. | 2.68 |
| WAT | Waters Corp. | 2.58 |
| PEP | PepsiCo Inc. | 2.55 |
| MHS | Medco Health Solutions Inc. | 2.19 |
| WMT | WalMart Stores Inc. | 2.14 |
Data source: Hussman Strategic Growth Fund annual reports cited in this article can be found in www.hussmanfunds.com. The pcitures of Market Climate,
S&P 500 6% Annual Peak-to-Peak Earning Growth, and the Project 10-year Rate of Return are can also be found from www.hussmanfunds.com
